Apr 08, 2016

    Better to disclose pledged shares

    THE spectacular crash in the share price of property company OKH Global last month raises a pertinent issue regarding disclosure of shares pledged by major shareholders for private loans.

    When the stock lost 80 per cent on March 21, investors scrambled to find possible reasons for the selling. Because most of the volume of 247 million shares traded that day came from foreign banks, brokers who bothered to plough through the company's 2015 annual report - available on its website - speculated that the collapse was possibly through forced selling.

    There is a footnote to a shareholding table on page 95 that says that chief executive Bon Ween Foong "is deemed to be interested in the 100,000,000 shares pledged to UBS AG Singapore, 45,000,000 shares pledged to Bank Julius Baer and 30,000,000 shares pledged to Credit Agricole (Suisse) SA, which are registered under his name".

    That forced selling involving pledged shares was the reason for the crash was confirmed by a company filing after the market closed that day which said 119.8 million shares pledged by Mr Bon had indeed been forced-sold.

    The important point to note is that before March 21, many in the market were not aware that shares owned by a substantial shareholder (who in this case was also a key company officer) had been pledged to various banks. The only people who would have known would have been those who actually read the annual report and seen the footnote on page 95.

    It is also important to note that there is currently no requirement under the Securities and Futures Act or the Listing Manual for substantial/major shareholders to disclose pledging arrangements when done in a personal capacity.

    OKH's annual report footnote was therefore commendable as present rules do not mandate such disclosure. This, however, should change since the OKH experience clearly demonstrates that such information was material and could have had a bearing on investors' decision-making when deciding to invest in the firm.

    This issue is not new. It has cropped up repeatedly over the past decade, particularly in the case of China firms, whose senior management are known to have pledged their shares for personal loans. If they are then unable to meet instalment payments and margin calls leading to the shares being dumped by lenders, the consequences can be dire for all shareholders.

    The case of Sino-Environment in 2009, for instance, is relevant in this regard because its chairman and chief executive lost his entire 56 per cent stake when his pledged shares were force-sold upon a loan default. His loss of control triggered an early redemption of $149 million in convertible bonds, which the group defaulted on.

    The problem is that while it may appear obvious that the rules should require disclosure of personal pledges by significant company officials and shareholders, actually effecting change may not be that straightforward.

    For example, there are privacy issues to consider since the loans would likely be for personal reasons.

    There is also the possibility that once such arrangements are made public, the market may then penalise the stock price by building in a discount based on the chance of forced selling emerging in the future.

    Balancing these concerns against the need for better investor protection therefore boils down to whether the disclosure regime here should be reactive or proactive.

    In our view, the latter is unquestionably preferable - investors should be told ahead of the event that there is a chance the value of their shareholdings could one day be eroded if the pledger is unable to keep to his repayment schedule.

    This is the view taken in most other developed markets and it should be adopted here.


    A version of this article first appeared on April 4 in the writer's blog Write On The Money.